Rotation was the theme for the week as investors sought bargains away from the technology sector in light of the probability of an interest rate cut in September.
The theme will be tested this week as two of the “Magnificent Seven” report, where earning expectations are high. Tesla shares have a had a rocky ride and are all but flat so far this year, whereas Google owner Alphabet (NASDAQ:GOOGL) has seen a price rise of 29% in the year to date, despite some more recent pressure. Meanwhile, as the quarterly earnings season ratchets up after what has been a promising start generally, updates are expected from the likes of Coca-Cola (NYSE:KO), General Motors (NYSE:GM), Ford, Visa (NYSE:V) and IBM (NYSE:IBM).
At the same time the Federal Reserve’s preferred gauge of inflation, the Personal Consumption Expenditures (PCE) index, will also test investors’ mettle with the latest release on Friday. Investors are fully pricing in a September rate cut, so any reading which upsets the investing applecart will inevitably lead to market volatility. Core PCE is expected to have slowed from 2.6% to 2.5% annualised, even though a marginal monthly gain from 0.1% to 0.2% is estimated. In addition, the current status of growth will be revealed with the initial GDP reading for the second quarter on Thursday, with a rise of 1.9% expected in comparison to 1.4% the previous quarter.
In the meantime, and despite a week which saw the Nasdaq fall by 3.6% and the tech sector within the S&P500 by 5.1% following the rotation, each of the main indices remain in rude health although there has inevitably been a small rebalancing of gains. In the year to date, the Dow Jones is now ahead by 6.9%, while the more tech focused S&P500 and Nasdaq have risen by 15.4% and 18% respectively.
Asian markets were mixed, with the Wall Street overhang playing its part, but with the main area of focus being on China. The People’s Bank of China cut short term interest rates by 0.1%, which was met with general investor apathy. Not only was the move seen as being insufficient to move the dial in reigniting the country’s recovery, but a general downward direction in interest rates was also seen as weighing on a banking sector which has been struggling with margins in any event, alongside an increase in consumer debts.
In the UK, markets opened at a brisk pace after a lacklustre run over recent trading sessions. The FTSE100 recovered some poise and now stands ahead by 5.9% so far this year, underpinned by a rise in commodity prices generally, as well as a warming of international sentiment and underpinned by an average dividend yield of 3.6%. In early trade, Entain (LON:ENT) shares moved higher following the announcement of a new CEO, but the standout performer was Rentokil, where weekend reports of a potential takeover by a consortium of private equity firms propelled the shares 14% higher. If confirmed, any such moves would also reignite concerns over a dwindling UK market at a time when there are some moves afoot to increase its appeal as an investment destination, such as the relaxation of listing requirements.
Elsewhere, the airlines again demonstrated the volatility that comes with investing in the sector due to factors beyond its control, the latest of which was the global technology outage on Friday, easyJet (LON:EZJ) shares fell by 6% and British Airways (LON:ICAG) owner International Consolidated Airlines by over 2%, with the general skittishness being exacerbated by an update from Ryanair (LON:0RYA) reading across, in which the group lowered its outlook for fares.
This week will also herald the beginning of the company reporting season in earnest, with a raft of updates expected from the likes of BT (LON:BT), Vodafone (LON:VOD), Unilever (LON:ULVR), AstraZeneca (NASDAQ:AZN) and ITV (LON:ITV). Of particular interest will also be half-year numbers from Lloyds Banking (LON:LLOY) and NatWest (LON:NWG), where investors will be looking to the usual metrics of Net Interest Income, Net Interest Margin, capital cushion levels and cost/income ratios for clues on the current state of trading. At the same time, shareholder returns will also be in focus, with further share buybacks a possibility in addition to the current generous dividend yields which the banks are delivering. In addition, any increase in the level of customer defaults will also receive attention, although both banks have thus far been taking an intelligent approach to risk.